Cooper-Standard Holdings Inc (CPS) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Cooper Standard Second Quarter 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded and the webcast will be available for replay later today.

I would now like to turn the call over to Roger Hendriksen, Director of Investor Relations.

Thank you, Michelle, and good morning, everyone.

We appreciate you taking the time to join our call today.

The members of our leadership team who will be speaking with you on the call are Jeff Edwards, Chairman and Chief Executive Officer; and Jon Banas, Executive Vice President and Chief Financial Officer.

Before we begin, I need to remind you that this presentation contains forward-looking statements.

While they are made based on current factual information and certain assumptions and plans that management currently believes to be reasonable, these statements do involve risks and uncertainties.

For more information on forward-looking statements, we ask that you refer to Slide 3 of this presentation and the company statements included in periodic filings with the Securities and Exchange Commission.

With that said, I'll turn the call over to Jeff Edwards.

Okay.

Thanks, Roger, and good morning, everyone.

I'd like to begin on Slide 5 with some highlights and key accomplishments in the quarter.

Sales reached a record high of $909 million, which was a year-over-year increase of 3.4%.

Adjusted EBITDA for the quarter was a record $114 million, that's up nearly 5% from the same period last year.

Cost reductions through improvement and operating efficiency totaled $18 million in the quarter, keeping us on track to deliver the targeted $85 million in cost reductions for the full year.

Through consistent execution of our strategy, we've now had 11 consecutive reporting periods in which we delivered year-over-year improvement in adjusted EBITDA and adjusted EBITDA margin.

We were also awarded contracts for $96 million in annual net new business in the second quarter, bringing the year-to-date total to $237 million.

Once again, we had significant awards in each of our key regions, with Asia Pacific being the strongest.

We successfully launched 54 new programs in the quarter, most of which were on global platforms.

The combination of our highly engaged employees and our launch management process has enabled us to successfully manage the complexity associated with these global launches.

And as always, I would like to thank our launch teams around the world for the great work.

Finally, I'm pleased to report that we continue to improve in the area of employee safety as a result of our total safety culture, which has been established throughout the company.

Through the first 6 months of this year, we have 54 of our facilities that have not had a single injury recorded.

Turning to Slide 6. Cooper Standard is well-positioned within the light truck and crossover vehicle segments.

We've discussed that a number of times with you.

Not only are these vehicles popular with consumers, they also offer higher content opportunity for our products.

Our content on light truck in North America, for example, averages nearly 4x our content on a passenger vehicle.

This favorable mix dynamic, along with our continued focus on serving our customers with innovated value-add technology, has allowed us to consistently grow our top line at rates that continue to exceed light vehicle production.

During the quarter, our revenue growth significantly outpaced the markets in North America, South America and Asia.

In Europe, if you exclude the impact of foreign exchange and divested business, we were essentially in line with the industry there.

So as we move forward, we expect to continue outpacing the global industry driven by sustainable favorable mix, increasing sales of innovative technology and our aggressive expansion in China.

Moving to Slide 7. We're pleased to report that during the quarter we were awarded contracts for $82 million in annualized new business for our innovative products.

These awards are highlighted by our second major production contract for Fortrex valued at approximately $27 million in sales annually.

We also won a major award with our MagAlloy fuel and brake products of approximately $40 million in annual revenue when fully ramped up.

In total, MagAlloy accounted for nearly $50 million in new contracts for the quarter.

Since the beginning of 2016, the total contracts awarded for our innovative products represent $385 million in annualized revenue.

This includes over $160 million for MagAlloy, over $100 million for ArmorHose and nearly $70 million for Fortrex.

Customer interest in these new products remains very high because of the value they provide for our customers.

In addition to contracts already awarded, we continue to see significant future opportunities.

We're extremely proud of our culture of innovation.

With a continuous stream of new ideas flowing through our pipeline, we see our ability to bring breakthrough innovations to the market as a clear and sustainable advantage for Cooper Standard.

We also see our innovative technologies in material science as a means to diversify into nonautomotive markets to accelerate the value stream for Fortrex and other technologies.

Slide 8 provides an overview on some of the opportunities that we're pursuing in those adjacent markets.

And we feel there is an ample opportunity for us to participate in the global nonautomotive rubber industry, which generates nearly $80 billion annually.

Some of the specific industry sectors that we think make sense for us initially include building and construction, wire and cable and footwear.

We've had a number of discussions with potential licensees in each of these sectors, and we're very optimistic about the possibilities of expanding our presence in these adjacent markets.

In fact, we recently signed our first license agreement for Fortrex outside of the automotive industry.

And this is certainly an important milestone in validating the technology for other markets.

So now that this first agreement is in place, we're seeing an increased level of interest for potential partners and licenses.

Finally, to wrap up my initial prepared comments, I'd like to highlight the fact that we continue to invest in our technical capabilities around the world in order to provide the most advanced technical service and support to our customers wherever they are.

On Slide 9, we have a few pictures of our new Test and Prototype Center in Qingpu, China, which officially opened last month.

This new center provides state-of-the-art design, testing and prototype capabilities and enables us to speed up product development, lower development costs and provide improved services to our customers.

It's a world-class facility and the only one of its kind in China.

And we believe this type of technical capability and market leadership will enable us to achieve the aggressive growth plans we have for China and, really, the entire Asia Pacific region.

So now, let me turn the call over to Jon.

Thanks, Jeff, and good morning, everyone.

The next few slides, I'll provide some additional detail on our financial results for the quarter.

I'll also comment briefly on our plans and priorities for capital allocation going forward.

On Slide 11, we show a summary of our results for the second quarter of 2017 and year-to-date compared to the same period last year.

Second quarter 2017 sales of $909 million were up 3.4% over the second quarter of '16.

This was, once again, an all-time record for us in spite of the lower OEM light vehicle production volumes in some of our key regions and the impact of unfavorable foreign exchange.

Adjusted EBITDA of $113.8 million was also a record high.

At 12.5% of sales, this reflects an improvement of 20 basis points over last year and was in line with our expectation.

Net income for the quarter was essentially even with last year as higher taxes, FX losses and the loss incurred on refinancing of our term loan offset a portion of our operating income growth.

Our effective tax rate was 33%, up comparatively year-on-year primarily due to the timing of excess tax benefits on share-based compensation.

For the first 6 month of the year, sales of $1.81 billion represented an increase of 4% over the first half of 2016.

Adjusted EBITDA and adjusted net income were up 6% and 4.5%, respectively, versus the same period a year ago.

Our effective tax rate for the first half of 2017 was 27.8%, which is essentially in line with our full year expectations.

Moving to Slide 12.

With respect to margin enhancement, you can see that our continued focus on improving operating efficiency, along with the contributions from recent acquisitions, helped to offset the pressure from wage increases, general inflation and the transition of certain vehicle platforms impacting production mix.

We continue to see commodity cost inflation on certain raw materials, but we have been able to substantially mitigate the impact thus far through continued supply chain optimization efforts.

Moving to Slide 13.

We ended the second quarter with $400 million of cash on hand.

Our total debt at quarter-end was $753 million with net debt declining to $353 million.

With cash on hand and an undrawn revolver, we are maintaining a solid level of liquidity at $580 million.

During the second quarter, we repurchased approximately 92,000 shares of our outstanding common stock at a cost of $9.3 million.

We also reduced total debt by approximately $9 million in the quarter by paying down a couple of regional loans that did not provide any tax benefit to us.

Free cash flow for the quarter was $20.7 million.

Through continued improvement in EBITDA and cash generation, we further strengthened our credit profile.

Our gross debt-to-adjusted EBITDA is at 1.8x, down from 2x at the end of the second quarter of 2016.

Our net debt-to-adjusted EBITDA was 0.8x.

Our interest expense increased just slightly over last year as a result of the refinancing we completed last fall.

You may recall, in the refinancing, we converted a portion of our term loan into a fixed rate bond and locked in at a rate of 5 5/8% for 10 years.

In spite of the higher interest expense, our interest coverage ratio remains at 9.9x.

In May of this year, we completed a repricing of our term loan, lowering the interest rate 50 basis points to LIBOR plus 2 1/4%.

While the repricing resulted in a $1 million loss in the second quarter, a lower interest rate will reduce expense by an average of $1.5 million annually going forward.

Moving to Slide 14.

As we look ahead, our free cash generation looks strong, supporting our strategic plans and priorities.

With this in mind, our capital allocation approach remains consistent.

Our top priorities are focused on investing in continued profitable growth, including the launch of new business, funding of our innovation programs and improving the growth and earnings potential of our operations through targeted restructuring initiatives.

In addition, we're continually evaluating opportunities for inorganic growth and market consolidation within our core product lines.

Following the allocation of cash to profitable growth opportunities, we anticipate returning excess cash to our stakeholders by buying back shares and paying down debt where it makes sense as we did in the second quarter of this year.

We continue to believe our shares are undervalued, and following the Q2 repurchases we just completed, we have approximately $92 million remaining share repurchase authorization left.

With that, let me turn the call back over to Jeff.

Okay.

Thanks, Jon.

And to wrap up the discussion this morning, I just want to take a minute to review our outlook and guidance for the full year 2017.

So let's move to Slide 16 please.

Following our strong results in the first half of the year combined with our current view of the global automotive markets and our opportunities for the second half of the year, we remain on track to deliver another year of record results in 2017.

We acknowledge slight headwinds in light vehicle production are likely to continue in certain markets in the second half.

However, we expect to continue to outpace the global market, driven largely by our strong product mix and the ramp up of new program launches throughout the rest of the year.

Our current outlook for sales as well as continued margin expansion remain in line with our previous projections.

As a result, we're reiterating our full year guidance.

So this concludes our prepared remarks so we'll open the line now for the Q&A portion.

(Operator Instructions) Your first question comes from John Murphy from Bank of America Merrill Lynch.

Just a first question.

I mean, obviously the macro landscape is potentially a little bit volatile.

We'll see how this all plays out given what we're seeing particularly in the North American market.

Jeff, if you think about potential schedule changes for weakness in the market, what are the levers that you pull to respond to that?

And how quickly can you?

And if you could maybe sort of remind us sort of in a fixed versus variable mix of your cost structure as well?

Yes.

Let me, first of all, John, address -- since you talked about North America.

It may be a little bit different than how you think about it.

And here's how I'd answer your question.

So in 2016, cars made up 39% of the total market.

Light trucks and crossovers were 61% of the market here.

By 2021, as you probably know, IHS continues to predict that this mix shift will continue and cars will make up just 34% of the market while trucks and crossovers will increase to 66%.

And as I've said many times, this is really good news for Cooper Standard.

In 2016, only 23% of our North American sales, John, were from cars and 77% were from light trucks and SUVs.

Our content per vehicle for crossovers is 42% higher than on cars.

And for light trucks, our content per vehicle is 260% higher than cars.

So as these trends are forecasted to continue, that's how I think we would like you to think about, at least in terms of Cooper Standard.

I realize that's not the same for all suppliers, but the CAGR in North America for that particular segment, as you probably know, is forecasted to be 3.7% growth rate over the next several years.

So that's the first answer to your question.

Secondly, as you know, we put together our business plan the beginning of each year.

With that is the IHS volumes, that's what we use as our baseline.

We also put together plans for each quarter assuming we would need to produce more and then we have a plan to do that.

If the volumes go the other way on us, we also have a plan to very quickly take cost out.

And Jon can get into the split between fixed cost and variable.

We've done a lot of nice work there and a lot of nice work in our breakeven as it relates to EBITDA and cash flow.

He can talk to you about.

But most importantly, in an operating company like ours, you want the regional teams to have already begin thinking in advance what they're going to be doing to take cost out.

And I can assure you, each year we go through that exercise.

So when it happens, it's as if we've already prepared for the fire drill.

We pull out that plan and we take off.

I'll turn it over to Jon just to let him explain to you a little detail about our fixed and variable as well as the nice work we've accomplished on breakeven.

Yes, John.

If you look at our profile right now, we're at about a 75% variable and versus 25% fixed cost.

So as Jeff indicated, incredibly flexible as we can respond to changes pretty rapidly there.

And we're trying to be proactive and continue to take cost out of the business from a net ops perspective continually to be even more flexible as we go forward.

That's incredibly helpful.

And then, just a second question.

As you look at the opportunity in China, which looks like it's great for you guys, what do you see as sort of the competitive environment there?

And how do you gain market share?

And then also, as you focus on that market, is the customer set more domestic or international that you're going after or is it all -- or both sets?

Yes.

I'll take the first part of that and Jon can get into our split between domestic and the western OEMs.

We have a little bit of color on that, I think.

First of all, let me continue along the same trend that we talked about with North America.

And you might be surprised -- you probably aren't surprised, John, because you know the market well, but the trends that we are seeing in North America related to SUVs and trucks are also being forecasted and even better are actually happening in China.

So we believe crossovers and light trucks will dominate the light vehicle market as China consumers begin to show their preferences for crossovers.

As a matter of fact, over the next several years, the total market in China is expected to grow at a 2.6% CAGR.

The trucks and SUV market is going to grow at a 6.3% CAGR.

So once again, for the Cooper Standard sweet spot, if you will, we feel very, very good about that.

We acknowledge that we were a little bit late to enter that market, but our penetration in average content per vehicle, while today, being compared to our more mature markets, looks low, we expect that content to double between now and 2021.

Of course, the other opportunity we have, and you mentioned it, most of our business today, 95-plus percent of it is with the western automakers and those joint venture companies that were established 15, 18 years ago, but we are also, with our local China team now, very focused on growing with the winning Chinese domestic players.

In fact, coming up here probably in the next quarter, we're going to give you some specifics around the revenue growth that we're achieving with the Chinese domestic.

It's very impressive.

Certainly, it's not dominating our growth opportunity there, but it is a very, very nice mix.

We just finished our 5-year strategy look this week, as a matter of fact, for China, and we're well on target by the early part of the next decade to achieve approximately $1.2 billion of sales in that market.

Of course, the trucks, SUVs, crossovers are a big part of that growth, but also part of that growth is outstanding work that's being done to grow with the Chinese domestics.

So hopefully, that answers the question.

That's great.

And then, just one last question, I mean, on the adjacent market opportunity.

I'm just curious, as you're running through these licensing agreements, how do those economics work?

And when we look at the sort of the 3 verticals that you highlighted on Slide 8, how big a slice are they of this $80 billion opportunity that you talked about in these adjacent markets?

And will you ever produce for these adjacent markets?

Or are they all going to be licensing agreements?

Yes.

The way it works, at least in the short-term, is we really view this as an opportunity to have a license agreement and to sell them, in this case, an example we're giving you is our Fortrex material.

So here's some numbers for you.

In the building construction business, we think we have 1.75 billion pounds of Fortrex-type material, we believe, that we could move into that space.

In the wire and cable business, 1.5 billion pounds.

In the footwear, 1.5 billion pounds.

So clearly, that's an opportunity.

We aren't looking to establish a brick-and-mortar strategy here, John.

What we want to do is establish license agreements with people that manufacture this type of product and they control the drawing.

So we have the ability to quickly get this product approved by those manufacturers who control the drawing for their customers.

That's our strategy.

So clearly, we'll drive cash and ROIC for the company going forward.

The overall market opportunity, to answer the other part of your question, is about a $76 billion market.

$59 billion of it is this industrial equipment, wire and cable, consumer medical market.

$10 billion of it is defense and other.

And then, $7 billion of it is building and construction.

So that would be the answer to your market question.

But how we tend to look at it, at least in the initial phases, is how many pounds of Fortrex could we sell.

And in this case, building, 1.75 billion; wire and cable, 1.5 billion; footwear, 1.5 billion.

Obviously, that's not all ours, but if we can get our fair share of it by convincing them that our Fortrex is lighter weight, better durable, meets all of the environmental and performance characteristics that you want in an automobile, as an example, in a building.

Think about the rubber between the windows in every office building in the world, most of it doesn't look very good after about 2 weeks out there.

The Fortrex product would look brand new forever, much lighter weight, higher performance.

So that's sort of the value proposition that we're working with these folks on, so pretty exciting stuff.

Jeff, I'm sorry.

Just the economics though, of like that first licensing agreement.

I mean, is it -- I mean, how do they get priced?

Are there -- I mean, just how does that work?

Yes.

So we established that with a company, John, that we've dealt with for many years.

We know them.

We trust them.

It isn't so much about what we were able to -- financially, it's not significant and I don't want to disclose it, but it's not significant at this point from a total dollars for the company.

But I can tell you it's 6 figures, but it doesn't start with anything more than a 1. So that's where we're at.

But the opportunity, in this case, with them is for wire and cables.

And they're a big supplier to the industry in Japan for wire and cable.

They're also one of the leading suppliers for building and construction in Japan.

So the opportunity here is to get in there and sell our compound to them.

We have -- I can tell you, more than 15 of these type of discussions that are going on with potential licensees across these sectors.

So this isn't like a one-off thing.

We've been working, really, for the last year-plus to build these type of relationships.

There's a lot of work going on between our engineering community and these folks, and we feel like our real orders are just around the corner.

So that's really all I can say at this point.

I'm sorry to keep beating this -- beating up on this, but -- I mean, so basically, it's straight cash payments for the licensing fees and there's really not much incremental cost to you at all once licensing fee is agreed upon?

Yes, that's exactly right.

And then, the opportunity to sell compound at, obviously, a nice margin for us going forward is the business model.

Your next question comes from Matt Koranda from Roth Capital.

I just wanted to cover the outlook and maybe fit it into sort of the operating bridge that you guys typically provide.

So could you help us understand just what's consuming the bulk of the efficiency improvements that you guys plan to make in the second half?

If we assume that AMI is positive and that volume and mix is relatively neutral to maybe slightly negative on volume, that sort of leaves pricing and inflation as the main sort of bucket as consuming the EBITDA improvement.

Could you help us understand that and sort of where the main headwinds are coming from in the second half of the year?

Yes, Matt.

I think you're right on point that price and some commodity headwinds that we're -- we've told you about before are challenges for the second half of the year.

But again, with our supply chain optimization efforts as well as continued savings we're going see from the restructuring programs that we've been working on the last couple of years, will continue to offset that margin pressure.

And specifically -- this is Jeff, Matt.

Specifically related to the raw material side, you remember in our previous calls, we talked about having $11 million or so of cost pressure built into our plan this year already.

And then, the last call, I talked about an additional $10 million for a total of $21 million that we were looking at.

As we go forward the second half of the year, that hasn't changed.

So there is no additional pressure that we're seeing in the next 6 months.

We have pretty good visibility there.

So I think we're thankful for most of that being behind us, if not all of it being behind us in the first half.

And then, our operating teams are just killing it.

I mean, they're doing a great job in our plants, well on track for this $85 million of cost out to help offset what are traditional economic pressures that we see in our business.

You asked also related to pricing.

Again, in this industry, there is always that pressure.

We don't see it being anything in addition to what we forecasted all along.

So we always look at this 1.7% or so of pricing pressure.

There's always a few outliers there depending on what new business we're trying to win in a particular year and you have to show up for those conversations, but nothing really going on there that's beyond what we would have talked to you about in the past.

Okay.

Great.

I wanted to hone in on Europe for just a second and segment profitability there during the quarter.

Can you just help us understand the drag that occurred during the quarter?

I think segment profit came in a little lower than what we would have thought.

But is it essentially euro strength that's causing a drag on profitably there?

Are there some sort of operating inefficiencies that you're encountering in the quarter?

Just any color there would be helpful.

Sure, Matt.

This is Jon.

On a year-over-year basis, there were some headwinds to the top line on the euro.

Last year, you were at $1.13 versus $1.10 this year, so some of that would fall through to the margin on Europe.

With the new programs that are launching, we expect Cooper Standard Europe to be ahead of the market, growing about 1.5x where they were in line essentially for the first half of the year.

On the margin side for Europe, in the quarter, we were unfavorably impacted by some mix pressure, but that was more of some planned programs rolling off that we fully expected being replaced by some new ones that are ramping up.

And so by the end of the year, they'll be fully running and on track for positive growth.

I'll remind you that the segment profit metric does include restructuring, D&A and an allocated portion of our corporate interest cost.

So it's a fully burdened look at the European operation.

And Matt, I'll add this on Europe.

This is Jeff.

One of the things that we've talked to you all about is how we're doing in terms of the restructuring for Europe.

We're doing a great job there.

We're well on target for our '18 coming-out party, so to speak.

We just went through their numbers this past week and all of the savings that we've been talking about -- and again, some of that has been coming in last year, this year and will hit next year, but we're going to spend approximately $87 million of Cooper cash versus $125 million that we had talked about when we first announced the program, so really great work leveraging, obviously, customers, works councils, governments helping us out there.

And then, the ultimate amount of money we expect to hit the bottom line over the course of time as a result of the restructuring, in current FX terms, will be around $43 million, $45 million versus the old FX number of about $55 million.

So right on track with Europe.

We expect Europe to be double-digit EBITDA next year as we have been talking to you about.

Great.

That's very helpful.

Maybe just last one on the Fortrex developments.

I know the licensing agreement was covered, but just wanted to cover the second award for static systems that you guys put into the prepared remarks.

Any color there on just region, platform or volumes?

I mean, it looks like, if I do the math here and what you guys provided, it looks like about a $27 million program potentially, but any color would be appreciated.

Yes, Matt.

As you know, when we won the last one, we couldn't disclose it.

We can't on this one.

Here's what I can tell you, that we have won 3 orders with 2 different OEMs.

Two of them are substantial orders.

We talked about one last quarter and now this one this quarter.

So that's from 2 different customers.

In addition, we have 3 customer-funded -- 3 other customer-funded development contracts that we're working on.

Two of those are with European OEMs and one with an Asian OEM.

So again, as we've said all along, when you get one, then the second one comes quicker and usually the third one comes even quicker.

We expect that this will really start rolling for us.

So we're really proud of that.

One of the things that we're doing is co-locating the launch teams.

Our new innovation center just down the road here that we'll talk to you more about next quarter.

And that group is going to ensure that we have a pristine perfect launch for the 2 that we have coming at us in the next couple years so that we continue to build the brand, the Fortrex brand and make sure our customers end up loving it as much as we do.

So -- and then, as it relates to the premium for the product, that's coming along very well.

The customers are willing to pay us for this because it's adding value to them.

Your next question comes from Mike Ward from Seaport Global.

Just following up on the Fortrex with the OEM contracts.

Are they -- is that a replacement program, the new one?

Or is that new business?

Yes.

In this case, Mike, it's a replacement program for something we already have.

Okay.

And then, on the adjacent markets, that seemed to come on a heck of a lot faster than, I think, everyone was anticipating.

And you have 15 different conversations going on.

Is it a faster business on those other segments?

Are they faster to come to contract than the automotive business?

Usually, in auto, you see this like 2 to 3-year lag at least.

And it seems like these adjacent markets, they tend to move a bit more quickly.

Is that the case?

Yes.

I think that's fair, Mike.

And one of the reasons we've picked -- I mentioned before, it's a $76 billion market out there so we could go in a lot of different places.

The reason we picked the 3 that we're talking to you about is because of the business model that I was mentioning with Jon earlier.

We really want -- and we've talked about dealing with the big chemical company.

Should we do that?

Or should we deal with folks that are in control of the drawing?

And we've elected, at this stage, to focus most of our attention on the latter because of what you just described.

They have the ability to test our product versus theirs.

They have the ability to immediately change the drawing and have the ability to immediately go to the market.

For wire and cables associated with automotive, you still have some of this similar length of time to get product approved, but for these other markets that we're describing, we think that we can get it done faster.

In fact, on the wire and cable that I talked about with a company that we've been doing business with a long time, they actually have production equipment on order and we expect after the first of the year to actually be in production there.

So that would have happened in probably a year or so from the time we started talking to them about it to get into production.

So that's a lot faster, as you know, in the automotive industry where it probably takes at least 3 and sometimes 5 years in the case of Fortrex sealing.

Not everyone shares John's downturn scenario.

And so if you look out over the next couple of years, if we're in this steady-state type environment, plus or minus 3% or 4% in the industry, it seems like you're getting -- the Fortrex wins on the automotive side will accelerate.

And if that's the case, do you have to address capacity?

At this stage, as I mentioned, John -- or I'm sorry, Mike, we have enough capacity here in the States.

We've selected one of our plants to be home of Fortrex, at least for the first wave of Fortrex orders, because we want to make sure we get it done right.

We put it on a plant -- one of our best plants in the world, as a matter of fact, will run that product and will launch all of this new stuff.

I think whether you believe the market's plateauing, whether you believe it's going to continue to drift downward or have a little bit of pressure, you can't dispute the fact that this truck, SUV, CUV CAGR is real.

I mean, and so for Cooper Standard, as you know, in our sweet spot, that's what I just want to make sure everybody understands is that the North American market is very healthy for us and this CAGR that's forecast for light trucks and SUVs going forward is fantastic.

The other thing that I would remind everyone on the Fortrex lines because most of you are very familiar with it, when you compare a Fortrex line to a standard EPDM extrusion line, remember it only takes up 1/3 of the space because it just runs that much faster.

So when you ask me about capacity utilization, we can put 3 orders in a plant that today houses 1. So I got plenty of excess capacity if we transition EPDM lines to Fortrex.

No problem at all.

Your next question comes from Brett Hoselton of KeyBanc.

We've been talking a lot about new products and so forth.

And I guess what I'm wondering is, as you think about your sales growth over the next 5 years, and I know that's a long time, but as you think about that growth over the next 5 years, can you give us a sense as to -- do you believe that you're going to continue to grow roughly at the same pace that you're growing at today?

Or is there an acceleration that you see in year 3 or 4, something along those lines?

Yes.

I think, right now, Brett, what we're saying externally is that we'll continue to -- at this 1.5x, 2x market growth.

That's what we're saying at this stage.

I think your question is fair.

I mean, we obviously will be taking a closer look at that with what's going on.

Obviously, we're having some really good success here with this new product introduction.

Our team in China is just doing amazing work.

A couple of you had the chance to be there in person a few weeks ago to see everything that's going on there.

And the level of confidence we have by early next decade for China to be over $1 billion, closer to $1.2 billion by 2021 is real.

So your question's fair.

I think, after the first of the year, when we come out with our guidance, you could potentially see that adjusted, but we'll save that for then.

One of the comments that I will make on China, I mean, think about this, guys.

We have -- in 2013, we had 1 plant for, say, $100 million of revenue.

By 2021, we will have 8 our plants in China that have more than $100 million of revenue.

And these are existing facilities.

So the ability for us to fill those up and drive margin expansion, ROIC expansion, I mean, that's our story.

And I think it's been very consistent.

We've been talking to you about it for quite some time and it's really here and it's happening and the revenue is there and we're filling up the plant.

So that will have a good impact.

And plus, when you do that, you start building great relationships with customers.

They start to trust you more in that region.

And there's not too many people that can compare with Cooper Standard in China, at least within our space.

And then, Jeff, as you -- again, kind of looking forward, how are you think about your margin opportunities?

You've obviously done a very nice job from a margin standpoint.

But going forward, do you -- what are some of the drivers of margin improvement that you see?

Yes.

I just mentioned the big one for China, right?

So get the plants filled up and leverage that existing fixed cost.

You'll see Song grow into his -- his SG&A there will be extremely competitive, 6%, 7% there by the time we get these buildings filled up.

What we've said all along is think about it this way.

In Europe, as a percentage of EBITDA, as a percentage of sales, we will move that business from the middle to high single digits to low double-digit EBITDA, really, beginning next year.

And we believe that, that will continue to grow at a steady rate and that that's sustainable for Europe.

Within Bill's business here in North America, currently running in the high teens, we expect that to continue.

In China, when we bought the business here a couple years ago, that diluted Cooper Standard's margin slightly.

They were running around 8%.

As a percentage to EBITDA, we were near 13%.

We said all along that as we get those plants in our operating system, we'll move their margins closer to where our margins were.

As we fill up those plants, think about China moving into the mid-teens.

And there's no reason that we can't continue to move closer to where North America is in a little bit longer term.

So that's the margin story.

ROIC is equally impressive.

In 2013, we were roughly 5%.

Finished the first half of this year, 13%.

We expect that number to obviously continue to move into the mid-teens, high teens as China comes on.

Your next question comes from David Kelley from Jefferies.

Just a quick one.

I guess, you're reiterating your full year outlook despite what feels like a step down in global production expectations for the back half of the year here.

So I wonder if maybe you could talk about where regionally you might be outperforming relative to prior expectations.

Is this primarily China outgrowth?

And how does favorable North American mix shift factor in here and maybe some launch ramps as well, maybe relative to the viewpoint of where we were in the prior quarter here?

Yes, David.

This is Jon.

I'll take that one and Jeff can fill in any additional color.

Really, it's the European market.

As I mentioned a few minutes ago, we expect to outpace the market about 1.5x and the -- for the full year and a little bit higher run rate in the second half obviously.

Asia will be in excess of 3x market.

So we continue to see the expansion and growth there.

South America, while small, we still continue to see favorability for us to exceed the market growth and recovery in that region.

And we'll hold our own in North America against what looks like to be a declining market.

We'll be favorable relative to that decline.

Okay.

Perfect.

And maybe just a quick follow-up as well.

Are you seeing any shift in price-downs from customers given this production step down here?

And do you think we might see some more aggressive industry-wide price negotiations in the near future here?

Yes, Dave.

I'll take this.

So this is Jeff.

The pricing discussion that I went through here a little bit ago, I think, is what we see.

So we've been pretty consistent in this, call it, averaging about 1.7% each year.

That's kind of the pressure we see.

If there's larger orders being discussed, whether they're conquest or replacement, sometimes that price pressure on a particular program or particular customer can exceed that, but nothing that I would say requires us to raise a flag.

We're still managing it the way we see it.

And while the customers are aggressive on price, and that's been the case for roughly the 33 years that I've been dealing with it, I don't see it changing a whole lot going forward.

There's enough fairness on both sides that you can come to an appropriate deal.

(Operator Instructions) Your next question comes from David Tamberrino of Goldman Sachs.

Great.

I just want to stay on the line of questioning for pricing as we think about the new technology awards.

I think you mentioned the second order that you called out this quarter being a replacement business.

Are you getting the previously discussed price upward for that incremental value that you're offering on those new technology products?

Yes, David.

This is Jeff.

We did.

That's what I was mentioning before.

I don't obviously get into a whole lot of color around pricing, but we have talked to you about the premium that we were going into the market with.

We've talked to you that the customers have been supportive of paying us a premium for that particular material, and that's consistent with this order that we just received as well.

Got it.

That's very helpful.

And then, just lastly, I don't want to steal your thunder for 2018 guidance probably at the Detroit Auto Show, but we're still expecting that big pickup year-over-year from Europe, correct?

About another $100 million in operational savings plus restructuring savings?

Yes.

As I mentioned, I won't get into the total that what I have told you all along that Europe will move to 10-plus percent EBITDA in 2018.

And the answer is, yes, they will.

That's what I'd said before.

It appears that there are no more questions.

I would now like to turn the call back over to Roger Hendriksen.

Okay.

Great.

Everybody, thank you for your questions and your engagement in the call this morning.

Feel free to give a shout if further questions come up during the course of the day and the coming weeks.

Thanks again for your participation.

Thank you, everyone, that conclude today's conference call.

You may now disconnect.